Claim Based on Illegal Manipulation of Securities Pricing Benchmark Allegedly Performed by Non-US Parties Outside the US May Proceed Where Limited to U.S. Transactions in Derivatives

The World in U.S. Courts: Fall 2017 - Racketeer Influenced and Corrupt Organizations Act (RICO) | September.25.2017

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Sonterra Capital Master Fund Ltd. v. Credit Suisse Group AG, US District Court for the Southern District of New York, September 25, 2017

The plaintiffs in this wide-ranging class-action lawsuit allege that the defendant global banks illegally manipulated CHF LIBOR—a daily benchmark designed to reflect the cost at which large banks are able to borrow Swiss francs. The plaintiffs allege they were injured in connection with transactions with the defendants and third parties in Swiss franc derivative instruments tied to the CHF LIBOR rate.

Among other claims under federal law, the plaintiffs alleged the defendants’ conduct violated the RICO statute. The claim was based exclusively on the allegation that the defendants committed wire fraud by making false CHF LIBOR submissions outside the US, and sending confirmations into the US for derivatives transactions incorporating manipulated CHF LIBOR. The defendants argued that these activities were outside the geographic reach of the wire fraud statute, and so could not support a RICO claim.

The Court noted that three prior cases alleging injuries based on manipulation of the LIBOR benchmark had recently been dismissed on the ground that domestic conduct did not support a violation of the wire fraud statute, and reached the same conclusion as to the case at bar. It focused on the allegation that the allegedly manipulative communications occurred between defendants located outside the US and the allegedly manipulated LIBOR quotes were likewise submitted to a non-US organization. In so doing, the Court characterized as having a “minimal nexus” with the US conduct of the type rejected in the LIBOR cases, including:

Transmitting false quotes through servers located in the US, causing [publishers] to publish manipulated LIBOR fixes into the United States, coordinating their derivative positions with their LIBOR submissions in electronic chat rooms through servers located in the United States, and sending trade confirmations based on manipulated LIBOR rates to counterparties in the US.

In reaching its decision, the Court distinguished a more expansive interpretation of the wire fraud statute that had been applied in a criminal RICO case.

[Editor's Note:  The Sonterra Capital Master Fund case is also discussed in the Antitrust/FTAIA section of this report.  On October 30, 2017, the first appellate decision addressing the extraterritorial application of the private civil RICO statute was issued, reversing in part the district court’s decision in Bascuñán v. Elsaca, which was covered in the Summer & Fall 2016 edition of The World in US Courts. Our commentary on the Court of Appeals’ decision was published by Law360 on November 3, 2017, and may be found here.]

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